PLR 200646023: Pension plan receives conditional waiver for 2005 funding shortfall

Plain-English summary

A company sought a waiver of its pension plan's minimum funding standard for the plan year ending December 31, 2005. The IRS granted the waiver after reviewing losses from discontinued business lines and the company's recent pension contributions. Approval depended on timely quarterly contributions and meeting the funding standard for both 2006 and 2007 without seeking another waiver. If either condition failed, the waiver would be retroactively void. The ruling also cautions that certain plan amendments or new retirement plans may have consequences while the waived deficiency remains unamortized.

Ruling snapshot

• Question: Could the plan receive a waiver of its 2005 minimum funding standard?
• Outcome: Conditionally approved, with retroactive invalidation if a condition fails.
• Key authorities: IRC §§ 412(d), 412(f); ERISA §§ 303, 304(b).

Full text (IRS public release)

Significant Index No. 0412.06-00

200646023

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

AUG 17, 2006

T:EP:RA:T:A2

Company =

This letter constitutes notice that a waiver of the minimum funding standard for the Plan for the plan year ending December 31, 2005, has been granted subject to the following conditions:

1. The Company makes the required quarterly contributions to the Plan due on
   October 15, 2006, and January 15, 2007, for the plan year ending December 31, 2006, in a timely manner, and meets the minimum funding standard for the Plan for the plan year ending December 31, 2006, by September 15, 2007 (without applying for a waiver of the minimum funding standard); and

2. The Company makes the required quarterly contributions to the Plan due on
   April 15, 2007, July 15, 2007, October 15, 2007, and January 15, 2008, for the plan year ending December 31, 2007, in a timely manner, and meets the minimum funding standard for the Plan for the plan year ending

December 31, 2007 by September 15, 2008 (without applying for a waiver of the minimum funding standard).

You agreed to these conditions in letter dated August 1, 2006, sent via facsimile. If any one of these conditions is not satisfied, the waiver is retroactively null and void.

2 200646023

This conditional waiver has been granted in accordance with section 412(d) of the Internal Revenue Code and section 303 of the Employee Retirement Income Security Act of 1974 (“ERISA”). The amount for which this conditional waiver has been granted is the contribution that would otherwise be required to reduce the balance in the funding standard account to zero as of December 31, 2005.

The Company’s primary business is the design, sale, and manufacture of From 1999 to 2003, the Company's sales declined from $ to

$ . This decline was primarily due to international competition and the effects from the events of September 11, 2001. In response to these developments, the Company reduced employment from 190 to 70 persons. In 2004, the Company's sales increased to $ , which led to a net profit of $.

The current financial hardship was brought on by the failure of two new lines of plastic rotational moulding equipment that the Company introduced in 2004. The new business lines generated a loss of $ in 2005. In addition, the Company will incur additional expenses as these lines are being liquidated and unrealizable inventory is written off.

In order to effect a recovery of its business, the Company has discontinued the new lines of business. In 2005, the Company’s continuing operations had a profit of
$ ; however the Company incurred significant losses due to the discontinued lines of business. Without the losses from the new lines of business, the Company would have been profitable with its continuing operations.

The Plan is poorly funded on a current liability basis. However, the Company has shown its determination to fund the Plan by making the required quarterly contributions due on April 15, 2006, and July 15, 2006, for the plan year ending December 31, 2006. Hence, the waiver of the minimum funding standard for the plan year ending December 31, 2005, has been granted subject to the conditions stated above.

Your attention is called to section 412(f) of the Code and section 304(b) of ERISA which describe the consequences that would result in the event the plan is amended to increase benefits, change the rate in the accrual of benefits or to change the rate of vesting, while any portion of the waived funding deficiency remains unamortized. Please note that any amendment to a profit sharing plan or any other retirement plans (covering employees covered by this plan) maintained by the Company, to increase the liabilities of those plans would be considered an amendment for purposes of section 412(f) of the Code and section 304(b) of ERISA. Similarly, the establishment of a new profit sharing plan or any other retirement plan by the Company (covering employees covered by this plan) would be considered an amendment for purposes of section 412(f) of the Code and section 304(b) of ERISA.

3 200646023

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

When filing Form 5500 for the plan year ending December 31, 2005, the date of this letter should be entered on Schedule B (Actuarial Information). For this reason, we suggest that you furnish a copy of this letter to the enrolled actuary who is responsible for the completion of the Schedule B.

We have sent a copy of this letter to the Manager, EP Classification in and to the Manager, EP Compliance Unit in

If you require further assistance in this matter, please contact

Sincerely yours,

Donna M. Prestia, Manager
Employee Plans Actuarial Group 2